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Retirement Planning

RETIREMENT PLANNING

THE ONLINE RETIREMENT GUIDE

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Retirement Planning

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Table of ContentsIntroduction 3Should You Retire 4What is Retirement Planning 6What To Think About 7What Will It Cost 9Employer Plans 12Uncle Sam’s Part 15Just Sign Here 20Stocks and Bonds 22Social Security 25Working in Retirement 27Your Home 29Health Insurance 32Your Will 34Joining AARP 37What Not to Do 39Reviewing your Retirement Plan 41Money Management 43Understanding Annuities 50Long Term Care Insurance 53Resources 58Conclusion 60



Retirement Planning

INTRODUCTION

Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese.

~Gene Perret

Now that quote might be humorous, but it doesn’t have to be true. Most people associate retirement with much more than not working. They also think that when you don’t go to the office every day you also don’t get that paycheck either.

Retirement is different things to different people. For those in their 20s, it's a distant dream. For those in their 30s and 40s, it's a minor concern. For those 50 and beyond, it's a reality that must be dealt with. No matter what your age, you should start to prepare for your retirement and the sooner the better.

Retirement planning is about more than investing and saving. It’s also about enjoying your life after you decide to retire from your career or job. To fully enjoy yourself after retirement, you should have a plan on how you will spend your time and where you will live.

You probably should start now to get in shape so you will enjoy a healthy retirement. What about your family, how do they fit into your retirement plans? Your retirement plans should go well beyond finances.

Many young people don’t think that they need to plan for retirement. Heck, I’m only 40 and I don’t really think about planning for retirement. But the reality is that there is no time like the present to start thinking about your future.

Unless you are near retirement age, you will no doubt procrastinate about retirement planning. It’s probably impossible to expect someone in their twenties to make serious retirement plans. Even those with 15 to 20 years left before retirement might have trouble with firm financial plans.



Retirement Planning

In your twenties, your retirement plans will probably consist of a basic savings program. Retirement is many years away and your thoughts are probably more on buying a house than on retiring.

In your thirties, your thoughts might be on sending your children to college and thoughts of retirement are not important. When you reach your forties, you begin the wonder where the years went and start to consider serious planning for when you retire.

Here, consider, is the key word. If you’re like most people, you consider planning but don’t quite get around to it. Then all at once, you are in your fifties and realization hits. You are near retirement age and haven’t given any thoughts to how you will afford to quit working and enjoy your retirement years.

OK, no matter what your age, there is hope for your retirement plan. Most employers provide a pension plan, the government provides social security, and you might have some investments and real estate. The younger you are the better but with some serious thought, you can pull it off.

Of course, first, you’ll need to commit yourself to quitting in the first place.

SHOULD YOU RETIRE?

Sure you like your job. But if you had the chance to retire early, say at age 50, would you sniff at it? Maybe you really like your black swivel chair. Perhaps you think your work is just too important to leave it behind. The truth is that there are other people out there who can do your job, and you can get the same black swivel chair at Staples!

For most people, a 30-year career is quite enough. But is early retirement realistic for you? Let's take a look.

At age 50, the government says you've got about another 33 years to live. That's longer than your entire working career. With life expectancy increasing by leaps and bounds, you may want to think in terms of a 40-year retirement.



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Besides travel, golf, fishing, and classes in paperclip art, what else is on the agenda? How much will it cost? Will you have enough to do it all? How much has to come out of each paycheck to raise that stash? Good question!

Have you thought about inflation? After all, peering out 20 years into the future you know that the $50K that looks like a good annual income now will certainly have to be larger to buy the same things then as it does today. But what's inflation going to be through the years? And that's just to get you to the first year of retirement. What impact will it have over the 40 years after that?

Where will you live? With luck, the mortgage will be paid off so all you have to worry about is property taxes. Maybe you'll even sell out and move into a smaller place in a sunnier climate. Sure beats having to shovel snow at age 70, even if it is further away from family and friends. Besides, the kids can always come down for a visit.

You should think about insurance, too. You're probably insured under group policies through work for disability, life, and health coverage right now. In fact, your employer probably kicks in some part of or maybe even the entire premium for that insurance.

Retire, though, and you will most likely lose that coverage. What happens to your spouse if you're inconsiderate enough to die early or (heaven forbid) become permanently disabled? If required to do so, how will you pay for a major illness or hospitalization and all of the attendant physician's bills?

Forget about Social Security or Medicare. You're way too young for either of those to apply. And even if you did qualify, will the assistance be enough for a survivor and/or all the medical bills? If not, what alternatives do you have? And what about long-term care costs?

About now you may be thinking: "Hmmm, perhaps I should have a few more children to support me in my old age." Don't worry, Fool. You needn't sire enough offspring for a soccer team. Our advice? Never leave your job.

We're just kidding, of course. We're confident you can retire at a reasonably young age without having to populate the Dakotas or remain shackled to your desk. The trick is careful planning. We'll take you step-by-step through the retirement planning process.



Retirement Planning

Retirement planning entails far more than just picking an age to do so and a beachfront property to do it upon. It requires a hard look at your lifestyle, your resources, and a whole host of factors that we tend to take for granted while we're working. Most, but not all, deal with money issues. As Fools, we face them head on.

WHAT IS RETIREMENT PLANNING

Retirement planning is the thought and commitment that you put into providing for income and a satisfactory lifestyle for your later years after you leaves the work force. Most people will spend an average of 25 years in retirement so careful planning is necessary for this to be a comfortable time.

When you reach retirement age, you will probably have in come from social security and possibly a pension but will that be enough? Will you continue to live in you present home or will you relocate? Do you want to travel? These and many more questions will need to be answered in you preparation for your retirement years.

Retirement planning should begin as soon as you start your first job but most are too busy raising a family to think about something that far away.

It’s awfully hard to think about retirement when you’re wondering where to find the best day care for your infant. This is the time to look at your pension plan or 401(K) at work and have as much as you are allowed or can afford contributed each pay.

As soon as you can, you should start investing a percentage of you pay for your retirement. These investments can be IRAs, mutual funds, stocks, bonds, money market, or other investment vehicles your broker might suggest. The secret is to make it a habit to invest regularly and not be tempted to use the money.

If you are older and just starting to think about your retirement, there are ways you can make up for lost time. Starting at a younger age gives you more time to accumulate money but with good investment strategies, you can



Retirement Planning

sometimes manage to make enough for a comfortable retirement. Discuss your needs with a reputable broker and stick to your plan.

Your retirement income will probably dictate where you will live and whether or not you can fulfill a dream of traveling. You might want or need to work well into your retirement years. More and more men and women are starting second careers after retiring from one job. The choice of when and how you retire is yours. Plan wisely.

There are a lot of things you need to consider when beginning your retirement planning.

WHAT TO THINK ABOUTWhen you are thinking about retirement, you need to set a few goals to

begin with.

How will you spend your time once you aren’t trudging off to work every day? There are lots of options for every retiree. You need to pick the one that’s best suited to you and one that will keep you busy.

Maybe you want to travel, start or continue a hobby, garden, play golf, dote over the grandchildren, or even climb a mountain or two. The possibilities are limitless. Dare to dream and then make those dreams come true. You’ve worked hard and you deserve a happy retirement. Retirement doesn’t mean you should resign yourself to sitting around talking about your ailments or feeding the pigeons in some park. It should mean freedom to explore life and all it has to offer.

Maybe you will be bored with the idea of not going to work every day. If this is the case, you might be happier working or volunteering once you retire. There are lots of retirees who have started a second or even a third career after retirement. I’m sure there are many ways you can volunteer if you don’t relish the idea of working for money. Almost every organization is begging for persons to volunteer time to help with the many activities and projects.

What about your health once you retire? You should start planning right now for a healthier body. If you smoke, stop. If you’re overweight, take



Retirement Planning

measures to slim down. Start an exercise and nutrition program so you will be as healthy as possible in your older years. Make a commitment to become a healthier, more active person and you will reap the benefits now and later.

Been putting off medical check-ups? Now is the time to get these done. By taking care of your health in your early years might help with securing health insurance at a reasonable rate once you are older.

Another area that you might need to develop is friends and family. A career sometimes doesn’t leave much time for cultivating friendships or enjoying your family. Once you retire, you will have more time to spend with these people but will they be there for you when that time comes?

Try to make time for family and friends, even if it’s just a few hours a week. The older you get, the harder it is to find and make new friends. If you ignore your family, they might not be there for you when you get older and feel you have more time for them.

So, in addition to investing and saving money for your retirement, now you need to make some additional plans. You need to plan how you might want to spend your retirement, where you might want to spend it, how to be healthy enough to enjoy it, and how to keep your family and friends around to help you enjoy it. This makes retirement planning take a whole new meaning. Retirement shouldn’t be considered an ending, it should just be a continuation of living.

Of course, money is important when you are thinking about retirement. When you don’t have a steady paycheck coming in from week to week, you will still have bills to pay and things that you want to do that will require money.

When you begin to plan for your retirement, ask yourself the following questions:

1. Do you have a pension or retirement plan at your place of employment and are you eligible?

Some companies do not offer retirement or pension plans and some jobs within companies are not eligible for these plans even if they are offered.

2. How much will your pension or retirement plan be worth when you retire?



Retirement Planning

This information is necessary so you can decide if you need additional savings such as an IRA to supplement your retirement benefits when you decide to retire.

3. If your employer provides a retirement plan, what happens to it if you change jobs?

Your employer can tell you if your retirement plan can be rolled over into an IRA, cashed in, or left with the company if you should leave the company. You will need to decide which is best for you to do.

4. If you retire early, what happens to your retirement plan with your employer?

Your employer can tell you when you are vested with the company and what you can expect to receive in the way of retirement benefits when you decide to retire.

5. Will pension benefits be reduced by Social Security?

In some instances, your benefits could be reduced by the amount of Social Security you draw. Discuss this with your employer to see if this happens with your pension.

6. Look at where your finances are right now. Gather all your financial information into one place and go over it to see what you have and what you need. Look at your benefit plans, social security, veteran’s benefits, and so on. Make a detailed list of your assets, such as real estate and investments. Next list all your liabilities, such as debts, loans, child support, and alimony.

Retirement planning is looking into the future and seeing how much money you’ll need to live a comfortable and satisfying life.

WHAT WILL IT COST



Retirement Planning

Pundits say you will need 60% to 85% of your gross household income today to sustain the same lifestyle after you retire. In theory, the higher your income today, the closer you are to the lower end of that scale. Fair enough, but you should look at this issue in a slightly different fashion.

Sure, we could sit down to a long, drawn-out process in which we look at our expenses and try to anticipate what they would be in retirement. But why bother? After all, retirement is a long way off, and we have no real idea of what those expenses will be then.

You do, though, know that you live comfortably today (we hope) and that it's unlikely you'll be saving money or paying FICA (unless you choose to work) after you retire. Therefore, excluding those items from your gross income, you can come up with a number that's fairly close to what it would take to sustain your current lifestyle.

Simply put, you want a retirement income that equals our gross income today less all savings and all FICA taxes.

But you still have to decide what income you will need in retirement to live the way you want. Some folks can get by on much less than they use now, while others may decide they want more. It's a personal choice for all of us. So, pick a number.

Now, let's talk about inflation. How much does our retirement savings have to be in the year we retire after it has been adjusted for inflation over the years between now and then? What should that inflation rate be anyway?

For how many years will you draw that income? Should it keep pace with inflation throughout those years? Will you draw down your starting retirement portfolio to support your income needs or just live off the earnings while never touching the principal? If you can answer those questions, then you can determine the starting portfolio you need at retirement to support you for the rest of your life.

We're getting into the realm of some pretty sophisticated calculations based on several assumptions that, if changed, could radically alter our results. What we need is a quick-and-dirty way to give us an idea of what we need to do to get started. We'll save the more esoteric efforts for later.



Retirement Planning

So forget about inflation for the moment. Ignore Social Security and any company pension you may get. Pretend your money gets no return now or after retirement. But do count whatever you have saved for retirement as of today.

Let's say that amounts to $20,000. Further, let's say you want an annual income of $30,000 in today's dollars after you retire. You expect to retire in 25 years, that you will live 20 years after you retire, and that you expect to meet your maker waving your last dollar bill.

How much do you need to amass by the start of your retirement to support yourself in your golden years, and how much do you have to save each year between now and then to get there?

Let's see. You need $30,000 a year for 20 years, so that comes to $600,000 needed in the first year of retirement. You already have $20,000 of that, so that means you're only $580,000 short. Divide the shortage by the 25 years you have to save it up, and you discover you only have to cough up $23,200 annually between now and the time you retire to a life of leisure.

Too much is omitted from this simple approach to provide a meaningful answer to the question at hand. Worse, the answer we do get makes the whole idea of saving for retirement seem to be an impossible task, but this is far from true.

To do things right, we must take a cold, hard, objective look at our desired income, subject it to a rational choice of assumptions, and make some detailed calculations.

The best way to do the calculations is with one of the readily available software packages available commercially, such as Quicken Financial Planner or you can find many different financial calculators online that can help.

Before you use any of these tools, you need some preliminary information. At a minimum, you want to:

1. Decide on the annual income you desire in today's dollars.

2. Pick a retirement date.

3. Determine your lifetime average inflation rate.



Retirement Planning

4. Determine the average rate of return you expect on your investments before and after retirement.

5. Determine the current market value of all your investments to include regular accounts, IRAs, and company tax-deferred savings plans like 401(k) plans.

6. Obtain an estimate of any company-provided pension benefit.

7. Obtain an estimate of future Social Security benefits

8. Armed with this data, you can determine the annual savings required for you to enjoy the good life. You will also be able to play "what if" games and see the results quickly should you decide to vary things like inflation, rates of return, date of retirement, and desired income.

We'll leave you with one last thought. The earlier you start, the easier it will be for you to amass the dollars you will need on the day you retire.

Say you put $1,000 per year for 25 years into an investment earning 10% annually, you would have $108,182. Wait just five years before starting that process, and on the same date in the future you would end up with $63,002. That $5,000 you "saved" by waiting just cost you $45,180 in tropical drinks.

Your employer can be a great place for you to start with to find the money that you need.

EMPLOYER PLANS

You've done your homework and now you know how much you have to accumulate to be able to retire and live comfortably. What now? The next step is to milk your employer for everything you can.

No, we don't mean that you should confiscate post-its for at-home use or try to create a black market for hole punchers. We're talking about retirement plans.



Retirement Planning

Most mid-size and large employers have a retirement plan in place for their employees. Many have two and some three or more. These plans come in a wide variety of flavors, some good and some not so good. All of these, though, can help you achieve your retirement desires if you understand them fully and integrate them into your planning.

Remember that employee handbook you received on the day you were hired -- the drab document you tucked away under some papers next to the half-eaten Snickers bar? Dig it out, dust it off, and read it. Buried in those pages you will find a summary plan description of the retirement plan(s) available to you as an employee.

Those pages will tell you what kind of plan you have, when you become eligible to participate, and the ultimate benefit you will receive. Is it boring reading? You betcha! But what you'll find in those pages is your FREE MONEY.

What will that free money look like? It might be called a "defined benefit plan" or a "company pension" -- phrases used to describe one type of plan commonly offered by employers. In this vehicle, employers typically do all the funding with no contributions by employees.

The final benefit is determined by a formula often based on years of service, an average wage, and a percent of pay. For instance, the plan could say your final benefit will be a "joint and 50% annuity calculated as 1.5% times your years of credited service times the average of your last three years' base annual wage."

What does that mumbo-jumbo mean to you? It means that with 30 years of service, at retirement your pension will replace 45% of your average annual wage for the last three years of work. It means it's less money you have to save each year between now and retirement because your employer is relieving you of part of that burden. And that means more of your resources can be devoted to other goals that are also important, like maybe putting the kids through college.

The summary plan description will also tell you your options at retirement. You may be able to receive a lump sum payment instead of a lifetime annuity. That way, if the plan has no automatic cost of living adjustment to the annuity payment, you can invest the money to achieve that growth.



Retirement Planning

Maybe you can take an annuity that will give a surviving spouse more than half your benefit after you die, something like two-thirds or 100% instead. And the summary plan description will tell you how long you have to be on the job until the money is 100% yours (the vesting schedule); it will tell you what happens if you leave your job before retirement, and what happens should you leave this world earlier than you anticipate.

This is all valuable information because it helps to refine the assumptions we must make in the calculation of our retirement needs.

Say your company offers a 401(k) plan. Take out your 401(k) summary plan description and look for:

• When you may participate

• The types and perhaps the risks of the investment options you have within the plan

• How often you may switch between those options

• Whether early withdrawals for hardships or personal loans are permitted

• What distribution options are available when you separate or retire

• How much your employer will contribute to the plan on your behalf, and when you will vest in those contributions? This is the FREE MONEY.

Why is it free? For one, your contributions to a 401(k) plan help reduce your tax bill because they don't count against your taxable income for the year. That means tax-free money towards your retirement savings.

Of far more importance, though, is an employer's contribution on your behalf. While these contributions will vary from employer to employer, typically employers match your contribution from 50 cents on the dollar up to 6% of your pay. That means if you put in 6% of your paycheck, your employer will match that by contributing 3%. (That's 3% of your paycheck in free money.)

You should jump at this opportunity. Rarely, if ever, should you turn it down. We know there is no risk-free, untaxed way to get an immediate 50% return on our money in any alternative investment we can make. Sure, most



Retirement Planning

401(k) plans use high-cost, mediocre performing mutual funds as their investment of choice.

Yet, even there, the immediate return of 50% on our money in every year we contribute would take years to top in anything else. Spurn this offer by an employer, and you exchange needless risk and taxes to leave found money on the table. When it comes to 401(k) plans, you should follow this path by grabbing all the free money your employer offers. What better way to lessen your savings burden?

You will still have to worry about taxes and things of that nature.

UNCLE SAM’S PART

Conventional wisdom holds that it's almost always better to invest in a tax-deferred vehicle like a 401(k) plan or IRA than in an after-tax investment. This gospel holds that even if the initial investment itself is made with money that's already been taxed, the earnings accumulate untaxed, and this adds immeasurably to the positive power of compounding.

Because your earnings (and often the contribution) are untaxed until you begin withdrawing money in retirement, the government is in effect providing you leverage in the investment. This boost thus allows you to amass far more money for retirement than you could in a taxable alternative.

Additionally, you control when it gets taxed, and at what rate, by deciding on the amount of the withdrawal and when to take it. By contrast, in conventional investments, you are taxed on all money going in and on all dividends and gains in the year they are received.

All things being equal, that general idea is true. But all things are not equal. When should you elect to invest in a tax-deferred vehicle as opposed to a taxable alternative? Use the plan at least up to the level where you obtain the maximum matching contribution from your employer. Don't turn down that free money.

Let's say your employer matches any contribution up to 6% of your salary. Most people would contribute that 6%, but beyond that they would



Retirement Planning

compare the returns available in the plan investments to those outside of the plan.

Here's a simple comparison between a tax-deferred investment like a 401(k) plan and an ordinary taxable investment. Let's assume that ultimately you'll withdraw all your money from the tax-deferred account, and you'll be taxed on that amount at today's marginal tax rates.

Of course, it's not quite that simple because, in reality, you'll decide how that money eventually comes out -- maybe all at once, maybe piecemeal, leaving the rest to compound. But for this simplistic analysis, let’s just say it’s enough. Let's also agree that all gains in the taxable account will be taxed at ordinary rates, even though we know that at least half would be taxed at the lesser capital gains rate.

For our example:

TR = your marginal tax rateRa = the return you expect in the after-tax investmentRp = the return you expect in the tax-deferred investment

Any earnings in the after-tax account will be taxed. Therefore, the equivalent rates of return in a tax-deferred or after-tax account can be expressed as (1-TR) * Ra = Rp, which can be restated as Ra = Rp / (1-TR).

All right now uncross those eyes. This formula gives you the rate of return you need in an after-tax account to equal the return you would get in a tax-deferred account after it, too, had been taxed at some point in the future. Let's take an example.

Let's say I'm in a 28% federal tax bracket, that I get no matching contribution from my employer or have already reached the maximum match, and that I deposit $100 into my tax-deferred account. I expect to earn 10% on that deposit. What rate of return do I have to get in an after-tax investment to equal what I'm getting in that plan?

Well, by using the formula, I get:

Ra = Rp / (1 - TR)Ra = 0.10 / (1 - 0.28)Ra = 0.10 / 0.72 = 0.138888 = ~13.89%



Retirement Planning

Therefore, if I deposited $72 in an after-tax investment (the equivalent of $100 deposited in a tax-deferred account) and I earned at least 13.89% on that investment, I would do just as well after taxes as I would in a tax-deferred investment earning a 10% return. If I could get more than 13.89%, I would do better.

Need a little proof? In the tax-deferred account a $100 deposit would earn $10 at a 10% return, giving a total of $110. Withdrawing that $110 and paying taxes at 28% would leave $79.20. $72 in an after-tax account would earn $10 at 13.89% or $7.20 after taxes, leaving $79.20 total in that account after taxes.

Use a 401(k) or similar plan to get the maximum employer matching contribution available. Beyond that level, compare your before-tax and after-tax investment options and select the one that provides the highest after-tax return.

But remember this: If you choose an alternative to the 401(k), then you must be just as dedicated and disciplined within that investment as you would have been within the 401(k). That means you must make your deposits in that investment each and every payday without fail.

It also means your deposit must increase at the same time and at the same rate as your pay does. Fail to adhere to that regimen, and you will neither equal nor beat the 401(k). The 401(k) demands these contributions and increases via automatic payroll deduction, so to keep pace with or to better that vehicle you must apply the same technique in any alternative.

The Taxpayer Relief Act of 1997 provides a unique opportunity to those of us who have reached the maximum contribution we wish to make to our employer plans. It's called a Roth IRA and may be established anytime after January 1, 1998.

With a Roth IRA, you may make a nondeductible deposit of up to $2,000 per year, allow the earnings to accumulate tax-free through the years, and ultimately withdraw all of the proceeds tax-free. This is an excellent vehicle for monies to be invested outside of an employer-provided plan.

Many people think the following phrase is true: "Retirees enjoy a lesser tax burden than those who work.” That may have been true in the grey and distant past, but it certainly isn't true now. Today, many retirees end up in exactly the same marginal income tax bracket after retirement as before. That



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situation will definitely be true for those who follow a Foolish path in their retirement planning.

Nevertheless, retirees as a group do tend to pay the taxman less in absolute dollars than they did before. Common sense should tell us why: they have less taxable income. The money they live on usually comes from savings (taxable), pensions (taxable), and Social Security (potentially taxable in part).

The addition of Social Security, which is never fully taxed, reduces the actual taxable income. Thus, a retiree could draw exactly the same annual income as she did when she worked, but pay less total dollars in taxes because part -- if not all -- of the Social Security income is received tax-free. Despite paying less dollars, though, that same retiree will still be in the same marginal tax bracket, albeit at the lower end of that range.

Throw some work in the mix and the plot thickens. Wages from work get taxed as usual. Social Security is trimmed as the retiree exceeds the maximum earnings limit for the year. In extreme cases, work could cause a confiscatory tax of over 80% on those wages when ordinary income taxes are added to the Social Security forfeiture. Kind of makes one wonder why anyone would want to work under that scenario, doesn't it?

If you're looking for a greatly reduced tax burden in retirement, forget it. The best you will achieve is a lower average tax rate on all the money flowing into the household for the year. Compute that rate by dividing your total taxes by all of your income, both taxable and nontaxable. For many retirees, the significant proportion of that income represented by untaxed Social Security payments does indeed cause the average tax rate to drop.

When and how does Social Security get taxed, you ask? The computation, like all Infernal [sic] Revenue Service requirements, is a tad complicated. In fact, they have a special worksheet just for that purpose. The math starts with your Adjusted Gross Income.

To that you add one-half of all Social Security benefits and all unearned income received during the year. The latter almost always comes from tax-exempt interest received from municipal bonds (a favorite retiree investment). If the computed total is larger than $25,000 (single) or $32,000 (married filing jointly), then up to 50% of the Social Security benefit will be taxed. If the amount is larger than $34,000 (single) or $44,000 (married filing jointly), then up to 85% of the Social Security benefit will be taxed.



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To determine the exact amount that will be taxed; you must complete the handy-dandy worksheet supplied by the IRS for that purpose. Doesn't that sound like fun?

OK! Now we know retirees have to pay taxes, too. But don't they get any breaks? What happened to the senior citizen discounts? Surely the government can't be that cruel. What is this, the Spanish Inquisition? Heck, I remember Gram and Gramps each getting an extra personal exemption because they were older than age 65. That's just gotta be there for today's retirees, too, right?

Uh... well... actually, no it's not. It's true that exception did exist at one time, but it got wiped out during one of the efforts by Congress to "simplify" our tax laws. Our leaders left something in return, though.

Currently, those over age 65 who do not itemize deductions on their income tax return get a higher standard deduction than a similar filer who is younger. The amount varies each year just as the regular standard deduction does. Hey... it isn’t much, but at least it's something. Provided, that is, you don't itemize on your tax return after you retire. Retirees who itemize get zilch.

There is one more situation in which retirees possibly can lessen their tax burden, and that's in the area of real estate taxes. Many states will grant real estate tax exceptions to homeowners of a specified age, usually age 60 or older.

These exceptions vary and may take the form of a partial exemption, a waiver, a freeze on assessment rates, or a suspension of payment until death. For those pressed for income, investigation in this area is definitely warranted to determine what the state of residence will permit.

While it's highly unlikely the tax can be avoided completely, it's equally true that when cash is tight, every dollar counts. In financial situations like that, every dollar not given to the taxman is a dollar earned.

As my daddy says, "There was a time when you saved up for your old age; now you save up for April 15th." I guess he's telling the truth. He's been retired for over 20 years now, and he still screams when he pays Uncle Sam.

Let's wind up with another old saw, "Only two things are certain: death and taxes." So you pay some taxes. It's better than the alternative, no?



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When you retire, you’ll be presented with papers to sign regarding any bonuses or pension funds.

JUST SIGN HEREYou're there. The magic day has arrived. The desk has been cleared, all

personal mementos have been carted home, and you have received the proverbial gold watch. All that's left is to get with the Personnel Direction to tie up some remaining loose ends, and then you're out the door forever.

The Personnel Director smiles sardonically as you enter his office and says, "We just need you to fill out a few forms, and you'll be on your way. Tell us how you want to take your money, sign this irrevocable option form, and you're out of here. You've got to make the choice on your own, though.

I can't advise you at all. You know why: liability issues, fiduciary responsibilities, lawyers, etc. But you're a bright guy. After all, you managed to last a whole career here, didn't you? You'll figure it out. Just tell me how you want to handle your distribution in the next five minutes, though, okay? I'm a busy guy and can't spend all day chewing the fat with ex-employees."

Making that choice is a piece of cake isn't it? Just grab the money and run, right? It isn't often that you see six-or-seven figure sums staring you in the face, and it's all yours. Snatch that check, deposit it in your bank, and board that cruise liner to luxury land.

You can work out the nitty-gritty with your tax advisor at the end of the year. Right now your better half is waiting with luggage in hand and the camera slung over her shoulder. Get a move on, guy, 'cause time's a-wasting!

Now, don't be too hasty, or you may be in for a very rude awakening. This choice is a one-time decision. Go the wrong way now, and you could very well lose about half of the money you've accumulated through your working career.

The taxman would steal it away while you weren't looking. This decision is not one that can be ignored or left to the last minute. You must know all of your options, and you must know the tax impact of each choice. Without that knowledge, it's too easy to make a mistake that could haunt you for the rest of your life.



Retirement Planning

For most of us, the sums that become available at retirement are the largest amounts of money that we will control in our entire lives. The decision on how we handle that money is probably the most important one we will make, as well. Knowing that, you need to know that this is one of the times in our lives when it makes sense to consult the experts.

In this case, about six months prior to retirement we would see a skilled tax practitioner who's experienced in retirement plan distributions. We would have that expert run the various scenarios for us to see the potential results. Then, armed with that knowledge, we would choose the option that best fits our personal situation.

How much would that cost? Anywhere from $200 to $750 is a good guess. Measure that against a possibly huge loss from your retirement stash, and most people would agree the advice is well worth the cost.

Generally, normally, usually, the best choice for a retirement plan distribution is to transfer that money to an Individual Retirement Account. By doing so, the tax-deferred status of that sum continues and we reduce our current tax burden.

Be aware, though, an IRA is not always the right choice, which is another reason to seek expert tax advice regarding these distributions. Once the money is in the IRA, it is subject to IRA rules. That's no problem when a person is older than 59 ½. We're free to withdraw as much money as we want at any time, and we will only pay ordinary income taxes on that sum. But what if you retire at a younger age?

Retire at age 55 or older, but younger than age 59 ½, and two factors come into play. At age 55, you may retire and receive qualified retirement plan proceeds without penalty. You will pay ordinary income taxes on any sum you keep.

Put that money in an IRA, though, and now you must play by those rules. Take money out of the IRA, and you'll pay ordinary taxes plus a 10% early withdrawal penalty because you are under age 59 ½. Bummer! You don't want to pay taxes all at once on your retirement plan money. You want the tax deferral of the IRA.

You don't want to pay that lousy 10% penalty on IRA withdrawals. And you still need money to live on each year until you can get at the IRA. What do



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you do? Add another reason to go see the tax consultant, Fool. You have several options, but to choose one of them you need to know their ramifications. The expert can outline them for you.

You could keep just enough money from your retirement plan to live on until you reach age 59 ½, and transfer the rest to the IRA. You'd have to pay taxes on the sum you keep, though. You could transfer all the money to the IRA and then make withdrawals under Section 72(t) of the Internal Revenue Code.

That's an exception that allows you to avoid the 10% penalty. But do that and you have to live with the income the computations produce, which may not be enough cash. Further, you have to take that income for the longer of five years or until you reach age 59 ½. Therefore, once started, you can't stop at will. What's the best choice? Ask your tax consultant.

A great way to build up your retirement income is to invest in the stock market.

STOCKS AND BONDS

We start this discussion with a quote from James Bryant Conant, American diplomat:

Behold the turtle. He makes progress only when he sticks his neck out.

He knew that cracks along the sidewalk would trip up the turtle from time to time. But the one who finds a comfortable pace and keeps his eye on the horizon will go places.

In our investing analogy, those cracks represent market risk. When it comes to retirement planning, you’re going to have to cross those cracks in order to get anywhere.

Market risk (the chance you will lose money) and reward (the chance that your investments will head skyward) travel hand-in-hand in the daily marketplace. The greater the risk, the greater will be the potential return for taking that risk.



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Equally true is the potential for loss, which quite handily explains why taking that risk should pay a greater reward. By and large, however, risk is pretty much a short-term phenomenon. That's particularly true in the stock market, which many regard as a quite risky investment.

Let's take a look at what various investments have returned over time.

Since 1926, U.S. Treasury Bills, which serve as a pretty efficient proxy for money market accounts, have yielded roughly 3.8% annually on average as of December 31, 2000, according to Ibbotson Associates.

While this may not seem like a lot today, remember that for much of this century, inflation was nonexistent, making a 3.8% average return very attractive until the 1960s. Had you put one dollar into T-Bills in 1926, you would have amassed $16.40 as of December 31, 2000.

Long-term government bonds have returned around 5.3% per year since 1926. The best 10-year holding period for bonds since then was that ending on December 31, 1991, when bonds returned 15.56% annually. The worst was that ending on December 31, 1959, when bonds had a negative return of 0.07% per year. Had you invested one dollar in long-term bonds in 1926, you would have $48.10 as of December 31, 2000.

Stocks have also been very good to investors. The Standard & Poor’s 500 composed of 500 international corporations, has returned an average of 11.1% per year since 1926 -- quite a bit higher than bonds. Surprisingly, the range of the returns for stocks is not that much larger than the range for bonds over the same period.

The worst 10-year holding period was that ending on December 31, 1938 when stocks declined 0.89% per year, including dividends. The best 10-year holding period for stocks since 1926 was that period ending on December 31, 1958, when stocks increased by 20.06% annually. Had you put one dollar into stocks in 1926, you would have seen it rise to $2,682.59 as of December 31, 2000.

The long-term odds are overwhelmingly in your favor. We know the market shifts everyday, sometimes sharply downward. That can be absolutely gut wrenching when it occurs, but history shows us that the inexorable pressure on the stock market is upward. The biggest bang for our buck will be found in stocks.



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When you are looking for a vehicle for growth over the long-term, stocks are excellent choices. Of course, there is some risk, bu there is great reward to be made on the stock market.

Think now about your retirement. When will it occur -- 20 years from now, five years, tomorrow? If you're close to it, or are already retired, how long must the money last? Now think about your retirement investments. Is the bulk of your money positioned for long-term growth (read: stocks) or short-term stability and income (read: bonds and bills)?

The mix you have in these instruments is something you must decide for yourself. After all, you're the one that has to sleep at night. Recognize, though, that investing for retirement is a long-term goal. Hence, you truly want to shoot for the best growth in your investments that you can get. That won't be found in bonds or bills over the long haul. If you elect to keep most of your money there, almost assuredly in retirement you will be eating franks and beans for dinner because you have to, not because you want to.

Recognize, too, that you probably still have many years of productive life ahead of you after you finally do retire. While bonds and bills may appear appealing for the income and safety they provide, half or more of your portfolio must still be invested for growth to ensure you can maintain purchasing power.

Average inflation for the 10-year period ending December 31, 2000, has been 2.71% per year. At that rate, the cost of all we buy doubles every 26 years. To a retiree living on a fixed income, that can be nothing short of devastating. That’s why you see the need for growth in a retiree's portfolio.

The lesson here is to avoid overly conservative investing, both now and after you retire. Too much safety can be costly to your financial health in retirement. If you are a mutual fund investor (and most 401(k) or 403(b) plan participants are), focus your attention on stock funds.

Compare their records over time to that of the S&P 500 index and each other. For 5- and 10-year periods, most funds will be below the market. In a company plan, though, you won't have much choice. Use the fund that comes closest to the S&P 500 average.

If your plan offers a stock index fund, that will probably be your best choice. Outside of a company plan, an S & P 500 index fund invariably is better than a managed stock fund for the long haul.



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If your company plan allows you to purchase your own securities or if you are investing outside of a plan, you have many more options.

Of course, you’ve been paying into social security for years. This, too, can provide you with some income.

SOCIAL SECURITY

"Social security? Fahgeddaboutit! There'll be no Social Security by the time we need it. The system is broke, and it ain't gonna be fixed. It'll be all used up before you and I ever get there."

Do you really believe that? Many of those under the age of 50 do, and the younger the age, the more prevalent that belief. We don't think so -- we know who votes and that our fearless leaders can count.

We accept the fact that Social Security is here to stay, but we also recognize that the system will almost assuredly give future recipients less than it does today. Therefore, because it will continue to play an important part in how we plan for retirement, we seek to understand today's system and will closely watch how it evolves in the future. By doing so, we know we can plan for retirement with more precision than we could by ignoring it.

With few exceptions, wage earners today see a payroll deduction for FICA (Federal Insurance Contributions Act) that reduces each paycheck by 7.65%. Those who are self-employed see twice that shrinkage from their gross pay.

These involuntary "contributions" are really taxes that go toward Social Security (6.2%) and Medicare (1.45%). For now, let's concentrate on that part of your earnings that goes to Social Security. What does this "contribution" get you?

Basically, the taxes you pay for Social Security buy you three things: income in retirement, income for survivors, and income in case you become disabled before you are eligible to retire. You must work and pay into the system to be eligible to receive these benefits.



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Generally, to qualify for full benefits you need to work at least ten years. The size of the benefit is based on your earnings and the number of years you have paid into the system. You may receive retirement benefits on or after age 62 and the longer you wait to do so, the higher that income will be.

Your spouse and, in some cases, your dependent children may also receive a benefit when you retire. If you die before or after retirement, a survivor's benefit may provide income to your spouse and dependent children depending on their age and work status. Become disabled and you, your spouse, and your dependent children may receive disability income based on your work record up to the point of disability.

In and of themselves, each of these benefits is a valuable asset to us all. They provide income protection to the family during and after our working careers. But do you know how much protection? Not unless you ask. And you should do so at least every three years.

If you do, you will receive something called a Social Security Statement (SSS), which is a great tool in helping you determine how much you need to set aside today to supplement Social Security in retirement. Remember, the system was designed to provide for minimum income needs in retirement, not all. Your own savings must add to that income so you can retire with the living standard you desire.

If you don't know how much you can expect from Social Security, you may devote more than you need to retirement savings, thus needlessly decreasing amounts available for other areas of your life today. The SSS will show you how much you can expect to receive if you elect to retire at age 62, your normal retirement age (65 or older depending on birth date), or 70.

Additionally, it will show you the earnings credited to your Social Security account for each year you have paid into the system; how much you would receive if you became disabled; and how much survivors would receive if you died. All that information is very important data on which to base your plans.

How do you get this data? Call the Social Security Administration at (800) 772-1213 and ask for Form SSA-7004, Request for Social Security Statement. When you get it in the mail, fill it out and return it. In about four weeks, you will have your SSS for review.



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In a hurry, you say? Then visit The Social Security Administrations website and make your request online. Either way, just do it.

Then, when it arrives, look at the statement closely. See an error in your reported earnings? It happens, and it could affect your benefit. If there is an error, contact the SSA immediately to see how it can be corrected. Often, all that's required is for you to send in a copy of the Form W-2 you received for the year in question to get the error fixed. Sometimes it takes more effort to fix the mistake. Regardless, you want to ensure all data is correct, and the only way to do so is to take action now.

Most people just want to enjoy their retirement and not have to worry about working anymore. Still others find that the sedentary lifestyle just isn’t for them and they decide to delve into a second career.

WORKING IN RETIREMENT

So now you've done it. You've retired from the rat race, and you're enjoying the good life. You're sipping on your Mai Tai and contemplating the mysteries of your navel. You're on the verge of developing that One True Theory of Lint.

Working again is the farthest thing from your mind. Who needs that routine when there's so much more to do? Suddenly, a wild thought intrudes on your meditations. Is it possible that you could (gasp!) reenter the workforce? But why would you want to?

You might -- particularly if you retired before you became eligible for Social Security payments. As you recall, that check can't come until you are at least age 62. Even if you're already drawing Social Security, you may decide to resume work simply because you enjoy the personal contact with others.

Maybe you want to feel more productive, desire some "mad" money, or just want to have time away from your life's partner. Many retirees do. Further, they work because they want to, not because they have to. They just enjoy it. But what does it mean financially when they return to work?



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The financial impact of a second career depends largely on the age at which you resume work. For those younger than age 62, a job serves to increase the ultimate benefit they will receive when they take Social Security.

In computing that benefit, the system looks at a person's entire working life. The computations are complicated, and use the best 35 of the 40 highest years' earnings. If you have a lot of zero-income years, that will lessen your ultimate benefit. Retire early, and you're bound to have a lot of those zero-income years. They will cause your Social Security check to be smaller than it could be. Resume work, and you'll pay into the Social Security system again, thus offsetting those zero-income years and increasing your benefit.

Is that a reason to go back to work? It might be. Then again, it might not. It's entirely up to you. If you've done a good job in planning for retirement, increasing your ultimate Social Security payment may not be an important factor to you. But be aware that an early retirement may come at a higher cost than you might have otherwise thought.

For those who do go back to work, at ages 65 and older there is no worry. Younger retirees, though, may see a reduction in their Social Security checks, depending on how much they earn in wages during the year. From ages 62 through 64, if you receive a Social Security check, you must forfeit one dollar of that check for every two dollars you earn above a certain maximum earnings limit.

That limit moves upward each year with inflation. In 2001, the limit is $10,680. Thus, a Social Security recipient who was age 63 and who receives $11,680 in wages in 2001 will be over the maximum earnings limit by $1,000. That excess will cause a $500 reduction in the Social Security benefits that person receives in 2001.

If you are under age 65 and return to work after you begin receiving your Social Security benefit, estimate what you will earn for the year and compare that amount to that year's maximum earnings limit. If you see you will exceed that limit, tell Social Security immediately. The agency will reduce your monthly check accordingly.

Fail to do so and those earnings will be reported to Social Security anyway when you file your income tax return for the year. The Social Security Administration (SSA) will then notify you of an overpayment because of excess



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earnings. It will recoup that overpayment from the following year's checks. You might not be working that year and may need your full Social Security payment.

What if your estimate was wrong and you didn't earn as much as you thought you would? In that instance, the SSA will restore the previously withheld benefit. You won't have lost a penny, but you will have avoided an overpayment.

Working after retirement has its good points and its bad points. Each of us must evaluate both. The point to remember here is to recognize the impact such work has on our Social Security benefits. Our endeavors may increase what we get from the system and -- possibly at the same time -- reduce the check we currently receive.

At this point, let’s take into consideration a few issues that need to be addressed.

YOUR HOME

Your home is more than four walls and a roof. (Yes! We forgot the floor!) For owners, it's much more than that. Your house is a money tree. Shake it, and the cash will rain down. The trick is in deciding whether, when, and how to tap into that honey pot.

Do we do it early in retirement, later, or never? As you'll recognize by now, that, too, is a personal decision. The home, especially when it's paid for, represents security. It's also one of the biggest investments we make. As such, it represents an asset from which we may obtain needed capital if and when that becomes necessary.

In retirement, we still have to reside somewhere. Wherever that somewhere is, we will either rent or own. At retirement, most folks own their homes. Many of them have either totally paid off or are close to paying off their mortgages.

Some will sell out and trade down to a smaller home. Some will sell out; keep the sale's proceeds and rent. Some will stay right where they are and enjoy the benefits of not having to pay a mortgage or rent. And a few will sell to buy a larger, more costly home.



Retirement Planning

Each of these decisions may be fine. Conversely, unless we know how our decision affects our own retirement life, each may also just be foolish. That means we need to look at the issues and plan accordingly.

Long-time homeowners know that their homes have increased in value since their original purchase. Often, that equity represents a princely sum that, if accessed, could yield an even greater return invested elsewhere. One way to get at that cash is to sell.

With the Taxpayer Relief Act of 1997, Congress has made that an even more attractive option than it once was. Now, we can sell our homes and receive gains of up to $250,000 ($500,000 for a couple) totally tax-free. That may be a great way to free up capital that can be better employed in retirement.

One scenario would be to sell and purchase a new, smaller home by making a minimum down payment on a 30-year mortgage. Lenders love to carry retiree mortgages because they have a very low default rate.

Then you could invest the cash left from the sale. As long as that investment throws off what we need for the mortgage, we'll be sitting in clover. We've freed the cash tied up in our present home so it can work much harder for us. Will it work for you? The only way to tell for sure is to run the numbers and see.

Maybe you don't want the hassle of home ownership again. Instead, you plan to sell, invest the cash, and rent. Will that work? It could. It depends on how much rent you will pay in retirement.

A home mortgage tends to be relatively stable through the years. Rent, though, has a nasty habit of increasing every twelve months. If you can invest your money to pay for those ever-increasing rent payments, then a lease may be an option worth considering.

Many retirees want the security of not having to pay rent or a mortgage. There is nothing wrong with that. Instead of the scenarios outlined above, you could just stay where you are. Alternatively, you could sell and pay all cash for a cheaper home. Cash left over from the sale could then be invested to throw off additional retirement income for your use.

In either event, when needed you can still get at the equity tied up in your home through one of two ways in most states. The first method is through



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a home equity loan (HEL) line of credit, and the other is through a reverse mortgage.

A HEL is nothing more than a loan secured by using your home as collateral. Because it's a loan, it must be repaid with interest. Repayment starts immediately, usually in the form of a monthly payment based on a 15-year amortization schedule.

For emergency cash, a HEL is a good vehicle. As a means of regular income, it is not the route to take. If you need the loan as income, then chances are you can't repay it. Failure to repay the debt will result in a foreclosure on your home.

A reverse mortgage is a means of receiving a regular, untaxed income as a loan against the equity you have in your home. The total loan amount is usually fixed, and may be paid as a lump sum or in monthly installments over a fixed period or for life.

Unlike the HEL, though, this loan doesn't have to be repaid until you die or sell your home. Then you or your estate repays all loan proceeds with interest. The beauty of this loan is that it doesn't have to be repaid until the house is sold and your legal obligation for repayment is limited to the value of the home at that time.

If the home declines in value, you will never owe more than your equity in the home on its sale. For elderly people living alone who are in need of cash, a reverse mortgage is definitely an option to consider.

Whether you own or rent, sell or stay, recognize that your house is more than a home. A home is a place of heartwarming memories, love, dreams, and good feelings. But "home" is a mental concept, and we can have a home virtually anywhere.

A house is a structure of sticks and bricks, of walls and beams. As such, it has a monetary value. That value can and should be used when needed. Your task is to determine if and when it is appropriate to do so.

Health insurance is another concern for retirees.



Retirement Planning

HEALTH INSURANCE

Health insurance is a major concern for retired folks. Once a person reaches 65, he/she is eligible for Medicare which can be quite costly.

In addition to Medicare, one needs supplemental insurance for whatever isn’t covered with Medicare. This supplemental insurance can also be quite costly.

Some companies provide health care insurance to its retirees but this is becoming very rare. If you are under 65 and have no bad habits or health conditions, you can find affordable health insurance but be aware that the premiums rise as you grow older.

If you plan to retire before reaching 65 and know that you will have to provide your own health insurance, you should try to get as healthy as possible. Lose weight, exercise, stop any bad habits and so on so that your premiums will be as low as possible in the beginning.

Access to affordable health insurance is crucial for maintaining the retirement income security of many retirees. In examining four groups of people age 55 and older—near-elderly employees (people between the ages of 55 and 64 who are still in the workforce); near-elderly retirees (those between 55 and 64 who have retired from the workforce); elderly employees (people 65 and older who are still in the workforce); and elderly retirees (those age 65 and older who have retired)—some trends in health coverage for these groups begin to emerge.

• People age 55 and older are disproportionate users of health care because they have more frequent and more severe health problems than younger, healthier people.

Deteriorating health is often a powerful incentive for older workers to retire. However, in recent decades, health care costs have risen two to three times faster than inflation. Inadequate health insurance coverage puts working families at risk of going without the health care they need in



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retirement.

• Prescription drug coverage is declining for most of the 55-and-over population, and the gap between health insurance and prescription drug coverage increases with age and retirement.

Because early retirees do not qualify for Medicare, and because Medicare does not include certain benefits such as prescription drugs, many retirees must turn to private health insurance. Although private health insurance can be accessed either through an employer or by purchasing a non-group plan in the private market, the latter option is likely to be prohibitively expensive or simply not available.

This leaves retirees to a large degree dependent on their former employers offering retiree health insurance. The share of retirees 55 and older who had part or all of their prescription drugs covered by insurance declined systematically and substantially from 1996 to 2000. The evidence suggests that older workers may stay in the labor force longer in order to maintain prescription drug coverage.

• Fewer employers are offering retiree health insurance.

Firms are reducing access to retiree health care because employers are looking to limit rising health care costs. In 1988, 66% of large firms (those with more than 200 employees) offered health coverage to retirees, compared to 34% in 2002. Among small firms with less than 200 employees, only 5% offered employer-sponsored health insurance (ESI) in 2002.

The coverage is out there, you just need to explore all of your options and then go from there.

When you retire – even before you retire – you should join AARP, American Association of Retired Persons. AARP provides countless benefits for its members including low-cost health insurance. They also offer discounts on dental insurance as well as vision coverage.



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AARP has a small membership fee that is well worth the annual investment. We’ll cover AARP more in-depth at the end of the book, but when it comes to health insurance and you can’t get Medicare coverage or you want additional coverage, AARP is one of the best ways to go.

Finally, you need to start thinking about a will.

YOUR WILL

It's unfortunate, but accidents do happen. One moment we're enjoying life to the fullest, and the next we're in another world. We never know when that mysterious moment will arrive, but savvy people know to prepare for that eventuality.

You've seen an experienced estate-planning attorney to ensure all your affairs are in order. The will is done and necessary trusts have been established. You've anticipated everything to include potential estate and/or inheritance taxes, so the family should have no problem. They will get to keep the bulk of what you leave behind and the taxman gets nothing. Easy as pie, right?

Let's face it, there are certain things we must do to protect our family and our wealth, if we have any. We don't like thinking about it very often, but think about it we must. We will die.

When we do, unless we have prepared for that inevitable result, we may create needless heartache and loss for those we leave behind. Estate planning is appropriate at any stage of life. It's particularly appropriate as we prepare for retirement. Therefore, let's take a quick look at things we must consider.

It's no secret that every adult needs a will. Die without one, and the state decides what happens to your property. Rarely will the state's mandate follow what you would do if you had the opportunity to act. You have that opportunity through a will. Use it. See an attorney to complete one.

It isn't that expensive to prepare and it ensures your property will be distributed in accordance with your wishes. In general, you should not use a preprinted, fill-in-the-blanks form will bought from a stationery shop or created through some of the software programs available for this purpose. These are



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often out-of-date and may not conform to the laws of your state. That penny saved may be thousands of dollars wasted after you die.

Do see an attorney. After you complete the will, ensure you review it every five years, at a minimum, to verify its validity and conformance with state law.

Be aware of what counts as an estate asset for tax purposes when you die. Basically, that's everything you own, including the face value of life insurance policies and the current value of all your retirement plans.

You may pass an estate of unlimited value to your spouse at death with no unfavorable tax consequences. When that spouse dies, though, there may be some heavy taxes that cause your children to receive far less than they should. Know that is possible and prepare for it.

In 2004 and 2005, you may leave up to $1.5 million tax-free to heirs who are not your spouse. If you leave those heirs anything above that amount, the excess will be taxed. Those rates start at 37% and quickly escalate to 55% from there. Sounds like a lot, doesn't it?

But count the value of your retirement plans, your home, the face value of life insurance you own, and everything else, and that amount is readily reachable by many. Couples must begin to worry about the possibility of estate tax when their combined assets approach this figure.

In today's world, with two workers in the family, this level can and will be reached with some frequency. Is it time to see the lawyer? If you want to protect the kids from Uncle Sam, the answer must be a resounding yes!

What if you become incapacitated, either mentally or physically? You might want to look into a durable power of attorney granted to someone you trust, such as your spouse or an adult child. You may also want to add a medical power of attorney. Both will allow the person you select to make decisions on your behalf.

Without those documents, your family will be forced to hire an attorney, go to court, and have someone appointed as your conservator and/or guardian to make decisions and conduct business on your behalf. That's a needless, time-consuming, and costly process that can be avoided with one or two inexpensive documents that an attorney can prepare today.



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Lastly, you may want to execute a living will. It's a silly name for a document that really says you want the right to die a natural death free of all costly, extraordinary efforts to maintain your life when that life can only be sustained by artificial means. This document is free in virtually every hospital in the nation.

It makes such decisions easier on the doctor, the hospital, and your family. Used in conjunction with a medical power of attorney, this tool can spare your family a painful, drawn-out, and costly process. If you agree with this concept, then visit your local hospital, pick up the form, complete it, and let your loved ones know where it can be found.

Estate planning encompasses much more than a will. It may be true that you can't live with lawyers, but you certainly can't die without them. Use their talents to ensure things work the way you want. Estate planning isn’t a barrel of fun, but it sure is necessary. And it's definitely a heck of a lot better than a poke in the eye with a sharp stick.

You can make your own will if you want. There are plenty of pre-made forms on the Internet that can walk you through making a will. However, if you have a great deal of wealth or belongings, it might be best if you consult an attorney or will specialist to complete your will.

As we said previously, AARP is more than just an organization for retired people. It’s an organization that helps seniors with their needs in so many ways.

JOINING AARPBack in 1958, Dr. Ethel Andrus founded AARP. The organization was her

way to promote productive aging and to help fellow retired school teachers find affordable health insurance. Medicare wasn’t enacted until 1965 to give seniors over the age of 65 health care, so her work gave a lot of seniors the health coverage that they needed.

The organization grew progressively over the years into what it is today. AARP remains true to its founding principles even now:



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• To promote independence, dignity, and purpose for older persons

• To enhance the quality of life for older persons

• To encourage older people to “serve” not “be served”

The services that AARP provide to its members are far-reaching and very valuable to many people over 50.

Here are just a few that they list on their website: www.aarp.org

• Discounted travel services

• Special senior cruises

• Money off a home security system

• Discounts at many major retailers and restaurants

• Medical prescription drug plans

• Financial planning

• Driver safety courses

• Computer courses including how to get connected and online

• Car insurance

• Dental Insurance

• Long term care insurance

• Life insurance

• Legal services

And those are just a few of the services they offer. They also give seniors information about legislation that affects them and gives helpful advice on how to deal with the special things that seniors have to live with.



http://www.aarp.org/

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Membership fees are easily manageable:

For retirees in the United States, you can join for:

5 years $39.953 years $29.502 years $21.001 year $12.50

Canada

1 year $17.00

Mexico

1 year $17.00

Other Countries

1 year $28.00

Joining is easy by going to their website and filling out a short form. The server is secure and you’ll be a member, just like that!

Just as with any type of budgeting and planning, there are some common mistakes that people make.

WHAT NOT TO DO

Just because you invest in a retirement plan doesn't mean you will be financially secure when you decide to retire. If you are making these retirement planning mistakes, you could be in for a sad surprise.

• Not taking full advantage of your company retirement benefits



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You should invest as much money into your company retirement plan as you can afford. At the very minimum, you should invest enough to get your company matching funds if they are offered.

• Withdrawing money from your retirement plan

By withdrawing money from your retirement plan, you lose valuable interest that is extremely difficult to replace. Some plans allow for hardship withdrawals and/or loans but you must be careful when taking advantage of these withdrawals. In addition to losing interest, you could face penalties or early withdrawal fees.

• Not actively monitoring your investments

Monitoring your investments makes sense so that you are aware of any discrepancies. Monitoring also alerts you to how well your investments are performing or not performing. If you are carefully tracking your investments, you will be better equipped to know when to switch to a different strategy.

• Relying on Social Security for your retirement income

While social security might provide a substantial portion of your retirement income, you should have other means of income as a back up. It's best to have a company pension or retirement plan and personal savings in addition to social security when you retire.

• Relying on your spouse's retirement plan

If one spouse relies on his/her spouse's retirement plan for his/her retirement, he/she could be in for a very sad surprise. The spouse with the retirement plan could die leaving the other spouse with no income. There could be a divorce or even illness that could compromise the single spouse retirement plan. Each person must have a separate retirement plan for the best retirement security.

• Forgetting to review your plan regularly

If you forget or ignore reviewing your retirement plan on a regular basis, you might be losing a portion of your retirement income. You need to periodically review your asset allocation, your balances, your goals, and so on to insure you are making the most of your plan.



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• Practicing poor asset allocation

Poor asset allocation can be financial suicide. What if all your investments are in one stock and the company goes bankrupt? The secret is to diversify so that if one investment decreases in value, another will hopefully increase.

• Not checking out your broker/financial advisor

There are lots of reputable brokers and financial advisors who are knowledgeable about how your portfolio should be set up and maintained. There are also quite a few brokers and financial advisors who are not so reputable or are simply ill informed. If you are going to trust your retirement savings to someone, you owe it to yourself to check credentials and track records.

• Relying too heavily on your company stock

Your company stock is a very good way to save for your retirement especially in your company retirement plan. This can be dangerous though if your portfolio consists of mostly company stock. All companies have lean times and some could have mismanaged finances that could result in bankruptcy. It's best to have a good investment mix in your retirement account.

• Not taking retirement planning seriously

This very well could be the worse mistake a person can make about his/her retirement plan. Even if you are a very young person, your retirement plan should be a serious priority. By starting early, you can grow quite a large nest egg and might just be able to retire early.

A lot of people feel they have plenty of time to worry about retirement planning once they have their home, children through college, the new Hummer, and so on. My answer to these people is to think about the life style they might want to keep once the paycheck stops.

Bottom line is to take your retirement planning efforts seriously, diversify your investments, save regularly, and keep your goals in mind.

Once you have a plan in place, you think you’re done – right? Sorry, but nope.



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REVIEWING YOUR RETIREMENT PLAN

A comprehensive review of your retirement plan every few years is almost as important as having a retirement plan. What you save for retirement is one of the most important financial challenges you might face in your lifetime so make sure you review and monitor it often.

Retirement Goals--Do the goals you originally set still apply? Do you still plan to retire at the age you first decided upon? Has an illness or other life event changed your retirement goals? Are your investments growing in a manner to finance your retirement goals? You might need to reevaluate your goals or set some now ones periodically because changes are constantly being made in our lives.

Personal Finances--Is your income more or less than when you originally set up your retirement plan? Do you have additional income to invest from a second job or your spouse's job?

Have you had a bankruptcy or had to make major purchases in the past few years that might affect your retirement plan? Do you have children in college that might dip into your retirement funds? Have you had to withdraw some of your retirement investments for personal use? Your circumstances at any given time will dictate what you can put back for your retirement.

Spending Habits--Have your spending habits changed significantly since you last reviewed your retirement plan? Maybe you got married or divorced, had a child, changed jobs, bought a home, made a large purchase, went middle-age crazy (yes, it happens to the best of us), or just don't seem to get around to saving regularly for your retirement.

Look at your budget and see if there are ways you can free up some extra money to put aside for your retirement. If you see you are putting too much aside, you might use the extra for a much needed vacation.

Investment Portfolio--Here is where you really need to closely scrutinize how your portfolio is balanced to get the most for your investment



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dollar. Depending on your age and how close you are to retirement will dictate whether your portfolio will consist of investments for growth, income, or a combination of both. Now is a good time to look at the companies you have invested in to be sure they are performing satisfactorily.

Social Security--If you haven't already done so, you should get a statement of earnings from the Social Security Administration to tell you what you can expect to earn when you retire. This statement is also a good way to make sure there are no mistakes in your account. Look over the figures and if you have questions or find a mistake, call the SSA immediately.

Health and Life Insurance--If you are working, chances are you have both health and life insurance but will these still be available when you retire? Some companies offer both to retirees but what will happen if you leave employment before retirement age? Have you made provisions for health and life insurance coverage or at least discussed these with an insurance agent?

Pension Plans--If your company offers a pension plan, do you know what type of plan it is? Does your company offer matching funds? Are you contributing all you can to the plan? Can you choose the investments and do you know how well they are doing?

How long does it take to be vested? What happens to your retirement plan if you leave the company? How much is your plan worth right now and how much can you expect it to grow between now and next year?

IRAs--If you have an IRA, would it be more beneficial to roll it over into a Roth IRA? Is your IRA earning you the best possible return? When can you roll it over to another fund?

Your retirement plan should be reviewed periodically to be sure it is performing the way you need it to for your retirement. The closer you get to retirement age, the more often you will want to review your plan.

Make sure any changes you make will benefit your end goals and carefully research every facet of your plan. Sometimes it is beneficial to run the numbers by a financial planner occasionally to be sure you have the best plan for your circumstances and goals.



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You must have a certain amount of money management skills in order to fully maximize on the plan that you put into place. Here are a few suggestions on how to best manage your money

MONEY MANAGEMENTIt’s something we’ve, hopefully, been taught since we were small children.

What is the best way to maximize the money that you have? The issue becomes especially important as we start to save for the things that we want and need – namely in this situation retirement.

Consider implementing the following tips to help you with your money management skills.

1. Have a financial record-keeping system in place at home to track income and expenses. This can be as simple as a green ledger form or as complicated as money management software. Just so long as you know where your money is coming from and going.

2. Have a household spending plan or budget and use it. Sure, things do arise that you can’t control, but stay with your budget as much as possible for effective money management.

3. Regularly reconcile your checks and ATM withdrawals. With the advent of online banking, many people don’t always receive a paper bank statement. However, you must be sure that your money is being accurately tracked and debited from your account.

4. Pay your bills on time. When you pay late, the extra fees charged can wreak havoc with the best of budget systems. Plus, late payments can adversely affect your credit report – something you never want to happen!

5. Compare offers from credit card companies before you apply for credit. There are some cards that charge a small interest rate on purchases with no annual fees. Those are the ones you should be looking for!



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6. When you have credit card debt, you should do everything you possibly can to pay off the balance each month. If it is not possible to do that, at the very least, pay more than the minimum each month.

7. Request and review a copy of your credit report at least once every year. There are three credit reporting agencies that you can choose from. Take note of the information included in the report and take steps to correct any discrepancies.

8. Identify immediate and long-term savings goals and how you will achieve those goals.

9. Make it a habit to save some money on a regular basis. A special favorite of mine is to pay for items with paper money and at the end of the day, deposit all change into a savings jar. It’s something small, but it can really add up!

10. It’s a good idea to have an emergency fund that will cover three to six months of living expenses in the event that something happens and you cannot work.

11. Put money into low-risk savings products. These can include savings accounts, money market accounts, or certificates of deposit (CDs).

12. When purchasing a vehicle, shop around for the best interest rates. Finance for 24 or 36 months while avoiding the ever popular 60 months. If you pay off your vehicle early, you won’t run the risk of being “upside down” or owing more money than what the car is worth.

13. You will get an annual Social Security statement from the Social Security Administration. Pay attention to what it says and what information is contained inside.

14. Calculate how much money you will need to retire comfortably.

15. As we have said before, you should join your employer-funded pension plan. Once you become vested, this is a great savings vehicle.

16. Contribute regularly to an employer-sponsored retirement savings plan such as a 401 (k).

17. Save money in a tax-advantaged Individual Retirement Account (IRA).



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18. Put money in different types of investments to boost returns and reduce risk.

19. Have a mutual fund.

20. DO NOT dip into retirement savings to cover other expenses. That’s what your emergency fund is for.

21. Search around to find the lowest interest rates and fees on a home mortgage.

22. Be sure you have a will.

23. Invest in disability insurance to cover emergency situations and make sure the coverage meets your specific needs.

24. For piece of mind, be sure to have adequate life insurance. This will cover not only your funeral expenses, but it can also leave your dependents with a little extra money to help after you’re gone.

25. Have adequate health insurance.

26. Explore the pros and cons of long-term care insurance.

27. Educate yourself about financial issues and keep learning. You never know what may eventually affect you and your money!

In retirement, it’s especially necessary to manage your money wisely. Sometimes people think so much about how to save for retirement that they give little to no thought towards how they will be managing the money that they have saved.

There are a lot of things to think about: health, age, hobbies, etc. when you think about making your money last. While you may not have enough money to do everything you want, you sure can make the most of what you do have!



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To make your money last in retirement requires some thought and planning. There are things you can do to make your dollars stretch.

According to the 2006 Social Security Trustees Report, in 2006, a 65-year-old man is expected to live to 82.1 years and a 65-year-old woman is expected to live to 84.7 years.

The Retirement Confidence Survey (RCS), which is conducted by the Employee Benefit Research Institute (EBRI), found that 6% of workers expect their retirement to last ten years or less. Another 25% believe it will last 10 to 19 years.

In reality, a 65-year old man can expect to live to 82. A 65-year old woman is expected to live to 85. An increasing number of Americans are living to be 100.

As we’ve said throughout this book, you first, you need to figure out how much money you will need in retirement. Experts say that retirees typically need at least 70 to 80 percent of their pre-retirement income.

Your money must last as long as you do. You may outlive your money because:

• You didn't save enough • Your investments don't keep up with inflation • You withdraw too much • You don't invest wisely • You don't have a pension that pays income for life

Financial experts say that you can take out somewhere between 3-6 % (most recommend 4%) of your assets each year in retirement, and not outlast your money. Most caution that if you withdraw more than 5%, the chances of going broke during retirement increase.

While it makes sense to take less investment risks when you reach retirement, some people go too far. With people living longer and longer in retirement, having some investments in stocks along with more stable bonds and cash may help your money last.

You should also think about the order in which you withdraw money from your different accounts. Generally, a good tip is to start taking money from your



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regular taxable accounts first and let your tax-deferred accounts grow as long as possible. Dip into your Roth IRA last. This may not work best for everyone, so check with a financial professional to be sure.

Health is an unpredictable factor. Even if you're putting much younger people to shame in the workout room, good health comes with no guarantees. Healthcare expenses can alter the amount you'll need in retirement, and medical problems can put a damper on all of your retirement dreams. The health of your spouse or life partner can also change the course of your retirement. Consider getting long-term care insurance. See our section on long-term care insurance to help you with your decision.

Social Security provides a strong base for retirement security. It is the largest source of income for older Americans. For most people, however, Social Security benefits will replace only about 40% of your paycheck. So they—and possibly you too—will need other sources of retirement income.

Deciding when to begin getting your Social Security benefits is important. You can get a reduced benefit beginning at age 62. But if you wait until your full retirement age (sometime between age 65 and 67), you'll get your full benefit. If you can wait even longer, your benefit will be even higher.

There is no clear cut answer on the best course of action. But if you can afford to wait, your benefit amount will be higher.

More and more older people are deciding to continue working in retirement. AARP research has found that about 70% of mid-life and older workers expect to continue to work in some way in retirement. While financial need is the major reason, many continue working because they like their work and enjoy being productive.

Many mature workers seek balance in their work and personal life. They want flexibility in the workplace. Options such as flextime, compressed work schedules, compensatory time off, telecommuting, job sharing and phased retirement are becoming more common.

You can give away as much as $12,000 to anyone without paying taxes. They don't have to be related to you. The gifts are nontaxable. Amounts vary from year to year so keep apprised of the rates with the IRS.



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Gifts can help you reduce your taxable estate to a level that is free of federal estate taxes. However, don't give away this money if it will leave you short of funds.

How and where you live can greatly impact your financial security in retirement.

Location is everything. Do you want to stay in your present home for as long as possible or would you be happy somewhere else?

Maybe, it's time for a smaller house. You may get a great tax break if you sell your home. A married couple, filing jointly, can earn up to $500,000 on the sale of their primary dwelling and pay no federal income taxes on the gain ($250,000 for individuals).

The great part about this tax break is that you don't have to be 55 or older as was once the case. It's no longer a once-in-a-lifetime tax break and you can take advantage of it every two years.

If you are thinking about moving, consider:

• Cost of living • Taxes • Climate • Family and friend support • Work opportunities

Cut your spending. People often spend more in retirement than they expected. A miscalculation of 10% is to be expected, because you have:

• More time to spend money and shop; • More leisure time and will be involved in more activities that cost money; • More time to travel; • A greater tendency to splurge.

If you're worried about running out of money, you may need to pull in the reins with steps like these:

• Luxuries/necessities. Distinguish between items you must buy and things it would be nice to own.



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• Stop credit cards. Put away your credit cards to help curb impulse spending. Only carry your credit cards for a planned purchase.

• Avoid ATM withdrawals. Decide how much cash you need and don't spend a penny more.

• Buy right. With the right planning, you can buy most of the things you want at a more reasonable price. Thoroughly investigating each purchase can help you get the best value or you may decide that the purchase isn't worth the money.

• Balance spending. Don't overspend in one budget area without cutting corners in another. If you take an expensive trip, you may want to cut corners by eating out less often or by waiting for movies to come to the bargain theater.

• Downsize. It may be time to move to a smaller house or sell that second car.

• Coordinate. Work with your life partner to keep you spending habits in line. Agree on a budget both of you can live with without feeling deprived. And stick with it!

• Prepare. Leave room in your budget for unexpected expenses. You never know when the furnace will stop or your car will need an expensive repair.

There are ways that your home can help you meet your financial needs in retirement. But be careful, because you don't want to lose your home in the process.

The equity in your home can be a source of cash in retirement.

• Loans. You might refinance your first mortgage and ask for a larger loan. This is called "taking out cash" and it allows you to have cash for any use you wish. If, however, you have a low mortgage rate and don't want to lose it, you could simply get a home equity loan. This is essentially a second mortgage that gives you a lump sum to use.

• Line of credit. You could choose to open a home equity line of credit. This essentially works like a revolving credit card: You borrow when you



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need the money and repay it on your own schedule, as long as you make the minimum monthly payments.

Some benefits. Borrowing against your home's value has several advantages:

o Tax break. The interest you pay may be tax deductible. Ask your tax advisor.

o Low rates. Because the loan is secured by your home, the rate is typically lower than other types of loans.

o Less risk. You can use the loan instead of cashing in stocks at the wrong time or withdrawing from an IRA prematurely. Both of those may trigger income tax payments.

• Reverse mortgages. AARP has an entire section devoted to guiding you through the pros and cons of reverse mortgages. In short, these loans allow you to borrow money and only repay it when you sell the home.

Annuities offer a tax-sheltered way to guarantee an income for life, or in the alternative, a set amount of income for a specific number of years. It all depends on what you need. Consider annuities only if you plan on investing for the longer term; otherwise, it might not be worth it. Annuities can be complicated and difficult to understand.

UNDERSTANDING ANNUITIESYou first step when looking at an annuity is to examine fees carefully

before making a purchase. Some people sell misleading or outright fraudulent products to unsuspecting people—so be sure that you ask questions and compare options before buying.

An annuity is a contract between you and an insurance company. Based upon the amount you pay in premiums, the company pays you income on an agreed upon schedule. As a general rule, you can't withdraw funds from the account before age 59 1/2. After that, you're only taxed on the earnings withdrawn.

First, decide how to make investments. Do you want to pay one lump sum or installments? Be aware that if you pay a lump sum—a "single premium



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annuity"—and later wish to invest more, you will have to buy another annuity. A "flexible payment annuity" allows you to invest more at any time.

If you want payments to begin immediately, you can get an immediate annuity. Otherwise, you could buy a deferred annuity, which will begin payments at a later date. Even with deferred annuities, you can buy one that matures in just a few years (although the payouts will likely be smaller).

• Payment schedule. You can select from a variety of payout options: monthly, quarterly, or annual payments starting immediately or starting some time in the future. Annuities are tax-deferred, not tax-deductible. Your money earns interest without your having to pay taxes. However, when you do start drawing from the annuity, you will pay taxes on the interest so consider the tax implications of your payout choice. For example if you are under 59 1/2 and make a withdrawal, you will pay a 10% penalty.

• Length of time. You'll need to determine if you want payments for as long as you live, for as long as both you and a survivor live, or for a fixed time. You will probably hear these options referred to as a "life annuity," "joint and survivor annuity," or a "period certain annuity." The longer the time the insurance company must make payments, the less each payment will be.

The two main categories of annuities are fixed and variable.

• Fixed. If you want pure predictability, buy a fixed annuity. It lets you set a guaranteed schedule of payments for a fixed period of time. Consider products that include cost of living adjustments (COLAs), as a way to keep up with inflation. Be aware that there may be fees, such as mortality and expense charges, deducted. Study so-called "bonus" offers on fixed annuities that make it look like you're getting a higher than usual interest rate. The bonus rate may only be good for a limited time—like a teaser rate on a credit card, the good terms that attracted you to the annuity may expire and you may end up with worse terms.

• Variable. If you're willing to take some risk in exchange for the opportunity to increase your future income, you can buy a variable annuity. You control how the money is invested from among a variety of mutual funds. Your income, therefore, will be variable, subject to the



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success of the mutual funds that are in your annuity. There may be a guaranteed minimum you will earn, with an unlimited upside; but there may be no minimum guarantee at all.

Variable annuities are generally not for those already retired or near retirement, because their purpose is to grow retirement savings tax-deferred over an extended period of time. Furthermore, the minimum rate guarantee may be as low or close to as low as what you could earn with a CD—but you'd be paying much higher fees for the annuity.

Pay attention to fees. Before buying an annuity, be sure you know how much you will be paying for the annuity. Here are some things to look for:

• Surrender charge. There's a charge if you want to cash out of the annuity. The amount is clearly stated in the annuity contract and differs from company to company. Usually, the surrender charge will go down each year until it completely disappears. Pay close attention to surrender charges; they can have a big impact on the value of your annuity.

• Withdrawals. Annuities have different withdrawal rules. Try to find a contract that allows for partial withdrawals. This would allow you a one-time right to take out up to 10% of the accumulated cash value without a fee or penalty (imposed by the contract, not the early withdrawal penalty imposed by the government, explained below). This can be useful if you need to tap the annuity during the years the surrender charge is in effect. In addition to the penalties imposed by the contract, taking money from an annuity may result in taxation and penalties.

As a general rule, if you withdraw money from an annuity prior to age 59 1/2, you'll pay a 10% early withdrawal tax penalty. This applies to earnings, not the amount you deposited. The IRS thinks of your withdrawals as automatically taking your earnings first and the amount you invested last.

So if you withdraw money before you reach the contractual date for receiving income payments, it's likely that the entire amount withdrawn will be taxable. However, once your stream of income begins, the IRS will view each payment as a mix of earnings and the amount you invested. Only the earnings are taxable.



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There are independent rating services that examine the financial health of insurance companies, such as A.M. Best, Weiss Research, and others. An annuity bought at a bank is not FDIC insured.

There are many reputable companies selling annuities. But annuities are a fertile area for fraud. One of the most common techniques is the switching, exchange or replacement of one variable annuity for another. A switch to an inappropriate variable annuity can cost you a great deal of money, but gives the salesperson a windfall. Be on the lookout if the proposal to replace the annuity comes from the salesperson, not from your own initiative.

Annuities sales people make very high commissions so there's pressure for them to sometimes force a sale. Be sure the agent is focused on your needs and doesn't simply come in and offer you a particular product without getting to know your situation first. Even so, don't trust too easily; sales training in annuities is intense, and the sales approaches can be tricky.

Long-term care insurance is something that seniors should also think about during retirement planning.

LONG TERM CARE INSURANCELong term care insurance is an insurance product sold through a licensed

agent or an insurance broker. It helps provide for the cost of long term care of an individual beyond a pre-determined period. Long term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid.

A common misconception about long-term care is that it is just for the elderly. Anyone of any age or occupation may need long-term care at any time. In fact, 45 percent of people receiving long term care are between the ages of 18 and 64.

People who require long term care are generally not sick in the traditional sense, but instead, are unable to perform the basic activities of daily living such as dressing, bathing, eating, toileting, getting in and out of a bed or a chair, and walking.

Also, long term care isn’t necessarily long term. A person may need care for only a few months to recover from surgery or illness.



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As individuals age, there is an increased risk of needing long term care. In the United States, Medicare will not cover the expenses of long term care, but Medicaid will for those who cannot afford to pay.

Once a health condition occurs, long term care insurance may not be available as the health problem would be considered a pre-existing condition.

In the Unites States, Medicaid generally does not cover long term care provided in a home setting. Also, in most cases, Medicaid does not pay for assisted living. It will, however, pay for medically necessary services for people with low income or limited resources who “need nursing home care but can stay at home with special community care services.”

People who need long term care traditionally prefer care in their own home or in a private room in an assisted living facility.

If home care coverage is purchased, long term care insurance can pay for home care often from the first day it is needed. It will pay for a live-in caregiver, companion, housekeeper, therapist, or private-duty nurse up to 7 days a week, 24 hours a day.

Assisted living is paid for by long term care insurance as in adult day care, respite care, hospice care and more. This insurance can also help pay expenses for caring for an individual who suffers from Alzheimer’s disease or other forms of dementia.

Other benefits of long-term care insurance include:

• Many old people may feel uncomfortable relying on their children or family members for support and find that long term care insurance could help cover these expenses. Without the insurance, the cost of providing these services may quickly deplete the saving of the individual and/or their family.

• Premiums paid on a long term care insurance product may be eligible for an income tax deduction. The amount of the deduction depends on the age of the covered person. Benefits paid from a long term care contract are excluded from income.



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• Business deductions of premiums are determined by the type of business. Generally, corporations paying premiums for an employee are 100 percent deductible if not included in an employee’s taxable income.

In the U.S., two types of long term care policies are currently being sold: Tax Qualified and Non-Tax Qualified.

The Non-Tax Qualified policy was formerly called Traditional Long Term Care insurance. This type has been sold for over 30 years. It often includes a “trigger” called a medical necessity trigger.

This means that the patients own doctor or that doctor in conjunction with someone from the insurance company can state that the patient needs care for any medical reason and the policy will pay. All benefits are taxable.

The Tax Qualified long term care insurance policies do not have a medical necessity trigger. In addition, they require that a person be expected to require care for at least 90 days and be unable to perform two or more activities of daily living without substantial assistance and that a doctor provides a Plan of Care.

The other part is that for at least 90 days, the person needs substantial assistance due to a severe cognitive impairment and a doctor provide a Plan of Care. Benefits are non-taxable with this type of policy.

Fewer and few non-tax qualified policies are available for sale these days. One reason is because consumers want to be eligible for the tax deductions available when buying a tax-qualified policy.

The tax issues can be more complex than the issue of deductions alone and it is advisable to seek good counsel on all of the prods and cons of a tax-qualified policy versus a non-tax-qualified policy. This is because the benefit triggers on a good non-tax qualified policy are better.

Once a person purchases a policy, the language cannot be changed by the insurance company. If the policy is an individual policy, it is guaranteed renewable for life. It can never be cancelled by the insurance company.

Most benefits are paid on a reimbursement basis and a few companies offer per-diem benefits at a higher rate. Most policies cover care only in the continental United States. Policies that cover care in select foreign countries do so at a rated benefit.



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Group long term care policies may or may not be guaranteed renewable. Most group policies are non-tax qualified and the benefits are taxable. Many group plans include language allowing the insurance company to replace the policy with a similar policy but allowing the insurance company to change the premiums at that time. Some group plans can be cancelled by the insurance company. Those types of policies are not recommended.

Retirement systems or funds sometimes offer long-term care insurance. These organizations are not regulated by state insurance departments. They can increase rates and make changes to policies without state scrutiny and approval.

Long term care insurance rates are determined by four factors:

1. The person’s age2. The daily or monthly benefit3. How long the benefits are for4. The health rating (preferred, standard, or sub-standard)

Most companies will give spousal discounts of ten to twenty-five percent.

Many companies offer multiple premium modes: annual, semi-annual, quarterly, and monthly with automatic money transfer. Companies add a percentage for more frequent payment than annual. Options such as non-forfeiture, restoration of benefits, ad return of premium are expensive and generally not recommended.

Some states, such as California, have a program called the Partnership for Long Term Care. This program contains, among other benefits, a lifetime asset protection feature in long term care policies. The Deficit Reduction Act of 2005 makes the Partnership program available to all who states who want to participate.

Many policies have a waiting period – also called deductible period – or elimination days that may differ from 20 to 120 actual calendar days. Many policies also required intended claimants to provide proof of 20 to 120 service days of paid care before any benefits can be paid.

In some cases, the option may be available to select “zero” elimination days when covered services are provided in accordance with a plan of care. Some may even require that the policy for long term care be paid up to one year



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before you become eligible to collect benefits. The reason to choose a higher deductible period is for a low cost premium.

Long term care insurance, just as with any other insurance, is a way to protect yourself in the event of an emergency. And, just like any other insurance policy, you can pay premiums for years and never have to use the policy. What you need to do is gauge how valuable a policy like this will be to you and go from there!

As you review each possible policy, ask yourself these questions:

• Do I need this policy?

• Is the maximum coverage adequate for my situation? For example, many people find that they never increase the replacement cost coverage on their house, even as the value of the house rises dramatically.

• Am I getting the best value for the premium I'm paying? For example, would I save money and still keep adequate coverage if I raised my deductible (which will lower your premium)? Should I spend a little time searching for the same coverage at a lower price with another insurance company?

• Are there gaps in my coverage? In other words, are there situations that very possibly could occur but that my policy wouldn't cover?

• How much of a discount would I get if I bought all of my policies from the same insurance company (assuming I could get coverage as good as or better than I have now)?

• Does my current insurance agent understand my needs and provide good service? If I don't have an agent, is the insurer's customer service helpful when I need them?

There are some great websites that can help you with your retirement planning. So much so, that they get a whole chapter devoted just to them!



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RESOURCESThe Social Security Administration has a lot of great information on their

website including a life expectancy table at the following address:

http://www.ssa.gov/OACT/STATS/table4c6.html

They can also help you with learning about and applying for benefits at:

www.socialsecurity.gov/retire2/near.htm

The SSA’s website will also assist you in knowing when your full retirement age is, how much your estimated benefit will be both if you take early retirement and if you wait until retirement age, and finding out how working during retirement can affect your benefit.

Use the calculators at this site to learn about if you’re saving enough money, what your income will be after you retire, what your expenses are likely to be, and much more!

http://finance.yahoo.com/retirement/calculator_index

There are many interactive worksheets at:

www.smartmoney.com

that will help you determine if you’re on the right track with your savings plan and how to budget for retirement accurately. This site contains a lot of great information for people of all ages about their money and using it wisely!

To find out how long your money will last during retirement, check out:

www.fireseeker.com



http://www.fireseeker.com/

http://www.smartmoney.com/

http://finance.yahoo.com/retirement/calculator_index

http://www.socialsecurity.gov/retire2/near.htm

http://www.ssa.gov/OACT/STATS/table4c6.html

Retirement Planning

Can you cut spending/change lifestyle during retirement? CNN has a cool calculator that shows you the average spending per category of people in similar situations as you. Find that tool here:

http://cgi.money.cnn.com/tools/instantbudget/instantbudget_101.jsp

When you consider buying an annuity, it can be helpful to know what it can provide to you in terms of income. Here’s a calculator that can start you on your way.

http://www.moneychimp.com/calculator/annuity_calculator.htm

And, of course, we can’t stress enough the amazing amount of information that’s available through AARP.

www.aarp.org

They can truly be a wealth of information for all of your questions when it comes to retirement!

CONCLUSIONMany people don’t take planning their own retirement as seriously as they

should. Some think it’s a dream they can never achieve and envision working behind the same desk or cash register for the rest of their lives.

The truth is that retirement planning, while it may seem tedious, is actually a necessary part of your life. As you age, you will decide that you want more out of your life and you need time to go grab that dream.

Retirement isn’t out of reach for anyone – as long as you come up with a solid plan and start saving early. You don’t want to invest in a company 401(k) plan at age 50 and expect the benefits from that plan to support you when you retire in the next 15 years.

Investments that you make grow the more time that passes. Interest accumulates over a period of time – a long period of time. You won’t be making



http://www.aarp.org/

http://www.moneychimp.com/calculator/annuity_calculator.htm

http://cgi.money.cnn.com/tools/instantbudget/instantbudget_101.jsp

Retirement Planning

any progress toward saving for retirement unless you start early and invest wisely.

You see, retirement is just an extension of life – it’s just life without work. You can and should live as well as you dream, but planning is the first step.

Human beings, it is said, are distinguished from other species by our ability to think ahead and to plan ahead. That may be true. It is also true, though, that most of us have great trouble thinking about the long term and preparing for it.

We're too caught up in the daily "thick of thin things." In this way we carry with us the immediacy of our animal cousins. Heck, it's difficult enough to plan something just six months ahead, like a summer vacation. How on earth are we supposed to be able to think about something in the distant future -- like retirement?

Thinking in advance, though, and acting on those thoughts, are keys to being ready for the future when it turns inexorably into the present. The younger you are, the more distant is retirement -- and the more power you have at your fingertips in the form of compound returns over time. It's a paradox that you can work to your advantage.

So start today and realize the benefits tomorrow – it’ll be well worth it in the long run!

Happy retirement!

The following websites were referenced in researching this book:

www.wikipedia.orgwww.retireplan.com

www.ssa.gov


http://www.ssa.gov/


http://www.retireplan.com/

http://www.wikipedia.org/

Retirement Planning

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